A Chronicle of Survival

House of Cards

In November 2, 2014: The New Normal, David Johnson wrote, “When the economic house of cards fell, it brought civilization as we know it down with it. Governments no longer had the funds to maintain infrastructure so they raised taxes on private industry to try to pay for it. Robbed of its profits, private industry laid off workers by the millions. Eventually, there wasn’t a currency in the world that was worth the paper it was printed on. In fact, if you have cash squirreled away right now, the best use for it is as a fire-starter. At least you’ll be warm for a while. Secondarily, you may want to consider using your cash as toilet paper.”

On January 30, 2012, investment manager, Robert L. Rauch said, “It is just a matter of time before the whole house of cards falls apart,” when referring to the March 20, 2012 target date for the Greek default.

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10 thoughts on “House of Cards”

Mine “Union Creek” is mine already, it’s not a farm or even a spread, but it’s paid for in full, has a small creek and some farm land very close by. The nearest town of 6,000 plus people is about 20 miles away.

I’m not saying it’s doom and gloom, but it is a far cry from looking good or even looking better than 4 years ago and the near future looks like crap!

OK, first, a Greek default will not collapse the house of cards. Greece in and of itself is too small. The Germans and French will not allow a disorderly default and are doing all the can to prevent same. The Greeks on the other hand are being forced to eat a shit sandwich with a double heaping of shit. The austerity demands are crippling the Greek people and the violence we saw last week will continue going forward. New elections could make this a very interesting deal. If you want a sense of how the average Greek is living, read this

The real risk, and the reason why the Eurozone is doing all it can to prevent a Greek default, it the knock-on or contagion effects to Portugal, Spain, Italy and Ireland as well as several of the eastern European countries and Cyprus. The European banks, particular the French, German, Swiss and Benelux, own much of the Euro-denominated sovereign debt that is at risk here. While these banks can survive Greek debt being marked down 50 or 60%, they would collapse if major haircuts happened to these other issuers. THAT is what has the European powers spooked and why they are spending so much time and effort on little ole Greece.

For those reasons, you will also see China, Russia, S Korea, Japan and the oil producers help out when the time is right and the best deal is squeezed from the Greeks. There will be quite a bit of firepower brought to bear to avoid a “disorderly” event that jeopardizes the Euro, etc.

That said, my colleagues and I are concerned about the number of “events” that could happen or come to a head in March. While I will not bore you with the list, on which is the Greek payments deadline, there are events spanning through Europe, the Middle East and the States. IMO, no single event is “bad enough” to collapse the system on its own, but should they happen together along with some other things we can not see now, and we could overwhelm the systems’ ability to respond.

Take the strategy articulated by Cloward and Piven in the 1960s on how to overwhelm the federal and state welfare system by having millions apply at a pace that will overwhelm the system’s ability to process and ability to pay. Their view was that millions of new would cost the system so much as to collapse it.

My worry is that March, or some later date, could see something similar – a cascade of events, one after the other, that is impossible for authorities to deal with. Worse, the general and investing public, seeing all hell break loose, lose confidence in the system and panic. Bank runs, food runs, gasoline runs. Panic feeds panic. Toby’s “New Normal”.

We got close in September and October 2008 but the US Fed and other central banks money whipped the system and we averted a meltdown, maybe by a matter of mere days. Unfortunately, those efforts and all that they have done since then has spent much dry powder leaving few policy tools left to address new problems.

While the concept of a EMP or hemisphere impacting solar storm is my worse nightmare, and the potential collapse of an overwhelmed system is what keeps me up at night. That said, I and my family can react to a slow to medium pace system burn.

I agree that Greece, in an of itself, is not enough to topple the entire House of Cards. That said, one domino topples another and eventually they all fall down. Where are we in the line of dominoes? It’s hard to tell. Suffice to say, we are in the line and the dominoes have begun to fall.

The US Dollar is still the world’s reserve currency and it’s a safe harbor in times of trouble. There is not enough gold in the world to return to a gold standard.

Toby, you mixed your metaphors but i think they are instructive. The dominoe metaphor is much more accurate in that a line of them falls in an order and, if they were laid by a master, could have forks and divergent or parallel paths. I think that is an apt analogy of a financial meltdown. Thus, i see us toward the end of one line of dominoes due to the Dollar’s status and the Fed’s ability to print more Dollars. It moght even be on a different line than the Euro. That provides a buffer, not immunity.

I don’t like the House of Cards analogy because it is so fragile and our system is a bit more robust than that. I prefer the comparison to the block game Jenga (sp?) where pieces can be pulled out but the tower can still stand. Yet, if a strategically placed piece is pulled, or a less strategic piece is removed carelessly, the tower tumbles. That better describes our system today.

In September 2008, our system got very close to a tipping point. Had the Feds not stopped in to support the money market funds, the banks or AIG, the system would have collapsed. At that point, a single major bank failure would have created the cascade of bad events that could have taken down much of the system of financial payments, including ATMs, ACH and wire transfers, credit and debit card transactions, etc. No transfers mean no restocking of goods or fuel. No ATMs, debit or credit cards leaving people with the cash on hand which is not much these days. Use your imagination from there and it is not too many steps to “The New Normal”.

For sure I can see a snowball effect if Greece leaves the Eurozone causing a global financial crisis. But I believe we can handle that crisis. I am much more worried about the impending strike on Iran which will add a security situation to a financial one.